Something was rotten in the state of Denmark for Domino’s Pizza Enterprises
(ASX:DMP), so the Brisbane-based pizza company has exited the market.
That move and changes mooted elsewhere and a slowdown in the pace of expansion raises the question of whether Dominos has well and truly gone ex growth everywhere as consumers cut spending – even on cheap, takeaway food in the face of high costs, weak incomes, rising interest rates and the prospect of little change to come.
Domino’s shares slid almost 10% on Tuesday to a four-year low after the pizza chain said underlying earnings had not improved.
The shares ended last week at $46.26 a share, Tuesday they fell to a low of $40.75 apiece which was down more than 10% before a small rebound took them back above $42 to end the session at $43.55.
That was still down more than 5% on the day and means the shares have lost around 34% year to date.
The weak commentary saw investors examine but ignore a series of initiatives intended to deliver a claimed $55 million increase in annualised underlying earnings performance. But before those savings are banked, the company says there will be one-off cost cuts costing up to $93 million.
Top among the cost-cutting measures, Domino’s will close all of its 27 stores in Denmark, ending its loss-making venture in the country.
The fast-food pizza retailer said it will also accelerate the re-franchising and closing of around 65 to 70 underperforming corporate-owned stores. This represents around 2% of Domino’s total 3,827 outlets worldwide.
The company highlighted that it expects improved earnings before interest and tax (EBIT) of some $25 million to $30 million in2023-24 from the combined initiatives. And that’s expected to increase over the following two years.
On top of shrinking the global footprint, Domino’s is under pressure from forecasts of non-recurring costs hitting EBIT by $80 million to $93 million in the financial year that wraps up at the end of this month.
Investors were also disappointed by the news that due to slower than anticipated rebuilding of its weekly delivery orders, underlying second half EBIT growth has not improved on its weak first half performance as hoped for
Commenting on the cost-cutting initiatives, CEO Don Meij said:
“The decisions of today will immediately deliver a stronger business and improve efficiencies for the long-term. As these initiatives are completed and deliver savings, we intend to reinvest approximately one third of these savings to stores, as we reinvest in the franchise network base.”
Mr Meij said Domino’s long-term plan includes “building out the sizeable opportunity we have in Europe and the Asia-Pacific to more than double our business”.
And while Domino’s reported new store openings in FY24 will be below the medium-term outlook of 8-10%, its long-term growth outlook for the company’s planned network of 7,100 stores by 2033 remains unchanged (meaning the company plans some sort of acceleration in build-out in the latter years of this decade).
Domino’s news that same-store sales in 2022-23 also remain below the medium-term outlook of 3-6% annual growth, was another negative.
The company’s Danish adventure looks like it has been a rather messy disaster.
In its presentation Domino’s said that it had acquired the Denmark business out of receivership from the former owners for 2.5 million euros (just under $A4 million).
The company said that exiting “Denmark is expected to result in $20-26m of closure costs in FY23” and the “closure will deliver $12 million in immediate earnings improvements.”
That in turn will see “operating results for this market will be classified as ‘discontinued operations’ and excluded from Domino’s underlying results.”
In other words, Denmark will be dead and buried, and so will other parts of the business as management undertakes a major cost cutting operation that will result in a miserable bottom line in 2022-23 and probably not much better if consumers continue their pullback into the 2023-24 financial year.
In Australia, Domino’s said it is reviewing its business units to identify efficiencies “including realignment of business structures, simplification of systems and removal of operational areas that are not core to our future growth”.
That includes the immediate closure of its Brisbane-based Construction and Supply Services subsidiary.
In Asia, commissaries – where pizza dough was prepared and shipped to stores – will be progressively closed, a move the company says was always part of the planned integration of the businesses in Taiwan, Malaysia, Singapore and Cambodia.
Having each store prepare dough in-house is expected to improve product quality, supply chain resilience and reduce costs. That will cost around $12 million, an extra $7 million in higher amortisation but lower IT costs of up to $7 million a year.
